Monetary Policy Uncertainty and Economic Fluctuations

Creal, Drew; Wu, Jing Cynthia

doi:10.1111/iere.12253

Cited by 139 publications

(80 citation statements)

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“…First, a growing strand of the literature has studied the measurement and the macroeconomic e¤ects of economic policy uncertainty. Proxies for uncertainty have been constructed via measures of forecast disagreement (Bachmann, Elstner, and Sims (2013)), by relating the location of the real GDP forecast errors to the sample distribution of the forecast errors of the same variable Sekhposyan (2015, 2016)), by modeling the common component of the volatility of the forecast errors of several macroeconomic and …nancial indicators (Jurado, Ludvigson, and Ng (2015), Ludvigson, Ma, and Ng (2017), and Carriero, Clark, and Marcellino (2018)), by exploiting Bloomberg forecasts to capture agents'uncertainty surrounding current realizations of real economic activity (Scotti (2016)), focusing on interest rate uncertainty as done by Creal and Wu (2017) and Istre… and Mouabbi (2017), or working with Google Trends data as Castelnuovo and Tran (2017). The focus of this paper is on economic policy uncertainty.…”

Section: Related Literaturementioning

confidence: 99%

Economic Policy Uncertainty Spillovers in Booms and Busts

2017

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We estimate a nonlinear VAR to quantify the impact of economic policy uncertainty shocks originating in the US on the Canadian unemployment rate in booms and busts. We find strong evidence in favor of asymmetric spillover effects. Unemployment in Canada is shown to react to uncertainty shocks in economic busts only. Such shocks explain about 13% of the variance of the 2-year ahead forecast error of the Canadian unemployment rate in periods of slack vs. just 2% during economic booms. Counterfactual simulations lead to the identification of a novel "economic policy uncertainty spillovers channel". According to this channel, jumps in US uncertainty foster economic policy uncertainty in Canada in the first place and, because of the latter, lead to a temporary increase in the Canadian unemployment rate. Evidence of asymmetric spillover effects due to US EPU shocks are also found for the UK economy. This evidence, which refers to a large economy having a low trade intensity with the US, supports our view that a channel other than trade could be behind our empirical results. Terms of use: Documents inJEL-Codes: C320, E320, E520.

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Section: Related Literaturementioning

confidence: 99%

Economic Policy Uncertainty Spillovers in Booms and Busts

2017

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“…The system is linear but not Gaussian, due to the error terms ln 2 j,t . However, j,t is a Gaussian process with unit variance; therefore, we can use the mixture of normals approximation of Kim, Shepard and Chib (1998) (20), (21), (23), (24), (25), and (26). For m 1:T , f 1:T | Θ, h 1:T , β, we use the particle Gibbs step proposed by Andrieu, Doucet, and Holenstein (2010).…”

Section: General Steps Of Mcmc Algorithmmentioning

confidence: 99%

Measuring Uncertainty and Its Impact on the Economy

Carriero¹,

Clark

Marcellino³

2016

Working Paper (Federal Reserve Bank of Cleveland)

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We propose a new framework for measuring uncertainty and its effects on the economy, based on a large VAR model with errors whose stochastic volatility is driven by two common unobservable factors, representing aggregate macroeconomic and fi nancial uncertainty. The uncertainty measures can also infl uence the levels of the variables so that, contrary to most existing measures, ours refl ect changes in both the conditional mean and volatility of the variables, and their impact on the economy can be assessed within the same framework. Moreover, identifi cation of the uncertainty shocks is simplifi ed with respect to standard VAR-based analysis, in line with the FAVAR approach and with heteroskedasticity-based identifi cation. Finally, the model, which is also applicable in other contexts, is estimated with a new Bayesian algorithm, which is computationally effi cient and allows for jointly modeling many variables, while previous VAR models with stochastic volatility could only handle a handful of variables. Empirically, we apply the method to estimate uncertainty and its effects using US data, fi nding that there is indeed substantial commonality in uncertainty, sizable effects of uncertainty on key macroeconomic and fi nancial variables with responses in line with economic theory.

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“…Ulrich () explains term premia on U.S. bonds through Knightian uncertainty about trend inflation. Creal and Wu () build a term structure model where second moments, which reflect uncertainty, have effects on several macroeconomic variables including the yield curve. A general equilibrium model of the term structure is presented by Leippold and Matthys ().…”

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Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks

Tillmann¹

2019

J of Money Credit Banking

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This paper studies the nonlinear response of the term structure of interest rates to monetary policy shocks and presents a new stylized fact. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long-term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about future policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall more strongly if uncertainty about policy is high. Conditional on a monetary policy shock, higher uncertainty about monetary policy tends to make securities with longer maturities relatively more attractive to investors. As a consequence, investors demand even lower term premia. These findings are robust to the measurement of monetary policy uncertainty, the definition of the monetary policy shock, and to changing the model specification.JEL codes: E43, E58, G12 Keywords: monetary policy uncertainty, term structure, term premium, unconventional monetary policy, local projections.THE TERM STRUCTURE OF INTEREST rates, that is, the range of bond yields across the maturity spectrum, is closely tracked by central bankers and market participants. The reason for this is twofold. First, long-term interest rates should contain information about the public's expectations about future monetary policy. Central banks use the term structure to study the stance of monetary policy perceived by markets. Second, the term structure itself can be a policy target. allow for the effects of conventional and unconventional monetary policy shocks on yields to vary over time.

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Monetary Policy Uncertainty and Economic Fluctuations

Cited by 139 publications

References 80 publications

Economic Policy Uncertainty Spillovers in Booms and Busts

Economic Policy Uncertainty Spillovers in Booms and Busts

Measuring Uncertainty and Its Impact on the Economy

Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks

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